Simple, conservative approach for prudential supervision

Release date

02 August 2017

The Reserve Bank aims to improve the effectiveness of its prudential regulation through a combination of simpler regulations and bolstering its supervisory activities.

Deputy Governor Grant Spencer said in a speech to the Kanga News Capital Markets Conference today that the Bank is considering how it might improve its regulatory framework. Two catalysts in this regard are the recent IMF Financial Sector Assessment Program (FSAP) report, and the Bank’s recently initiated review of bank capital adequacy.

“We must maintain the high international reputation of the New Zealand financial system. Within that, we seek to maintain and build on the Bank’s non-intrusive supervisory approach and simple-yet-conservative prudential requirements.

“Compliance with the international prudential frameworks is not always a black and white choice. The Basel framework sets minimum standards for key prudential requirements, but often offers a menu of choices within those standards, for countries to tailor to their specific circumstances. A small country like New Zealand implicitly has a greater degree of freedom.

“We will continue to place emphasis on getting the right incentives in place for prudent institutional governance, supported by effective market discipline that increasingly makes use of technology advances,” Mr Spencer said.

“We want to simplify the current regulatory regime in a number of areas, but also heed the IMF’s advice about improving the effectiveness of our supervisory model. The IMF has recommended an increase in resourcing to achieve this.

“We believe the supervisory regime could be usefully bolstered through increased use of thematic reviews on topics of broad prudential interest. We are also looking to make greater use of targeted reviews by external experts in cases where serious non-compliance becomes apparent at particular institutions.

“With regard to the current review of bank capital adequacy, we are leaning towards simplifying both the allowable capital instruments and the methods for measuring risk, though we are in the consultative phase and far from making any decisions. We do not believe that New Zealand’s relatively vanilla banking system warrants a high degree of complexity in its capital regime.”

Mr Spencer said that the Bank will also review the minimum capital ratios. New Zealand’s relatively high-risk profile, due to high industry and portfolio concentration, supports a conservative approach relative to international peers.

He added that the Bank is mindful of inefficiencies that can be created if its prudential requirements needlessly or disproportionately add to the cost of financial intermediation, stifle innovation or disadvantage some institutions over others.

“The Bank sees its current Dashboard project as an important step in an on-going effort to support and enhance more effective and efficient disclosure for banks, insurers and other financial institutions.”

The Bank will explore how the macro-prudential framework can be made more robust through a stable and well-signalled policy process. The Bank will also be applying its key principles of simplicity, incentive alignment and conservatism in the upcoming review of the Insurance (Prudential Supervision) Act.

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